Payment of Stamp Duty on Individual Member Agreement for Redeveloped Area Adityaraj Builders v. State of Maharashtra: A case comment

Introduction

The real estate sector being the second largest generator of employment in the Indian economy has regained its momentum in the market today after experiencing a slowdown during the tenure of Covid Pandemic.¹ Buildings which are old, dilapidated and in a precarious condition along with being unsafe for habitation are undergoing redevelopment rapidly in order to prevent any kind of damage and/or loss to the lives and limbs of the tenants/occupants as well as to the building property. Shedding light upon the concept of redevelopment, we can state that when a society appoints a developer for the redevelopment of their society property, the developer allots to each and every member of the society permanent alternate accommodation free of any cost and on ownership basis in the proposed new building accompanied with providing transit compensation to the members of the society during the period of construction of the new building. However, if any society member desires to purchase any additional area over and above to what is being provided to him/her by the developer in respect of redevelopment then the same can be purchased by him/her for consideration. Apart from execution and registration of a Development Agreement (more particularly referred to as the “DA”), other agreements of and incidental to the DA like Permanent Alternate Accommodation Agreement (PAAA), power of attorney (POA), etc. are also entered into accordingly.

Analysis of the ruling of the Bombay High Court

Placing reliance upon the idea of redevelopment, the levy of stamp duty appears to be one of the major concerns of the relevant parties. A Division Bench of G.S. Patel and Neela Gokhale, JJ. of the Bombay High Court pronounced a landmark judgment on 17-2-2023 in Adityaraj Builders v. State of Maharashtra pertaining to the levy of stamp duty on the permanent alternate accommodation agreement.² The petitions dealt with a common question of law under the Maharashtra Stamp Act, 1958³ (the Stamp Act) with respect to the levy of stamp duty on the permanent alternate accommodation agreement. The petitions challenged the Circulars dated 23-6-2015 and 30-3-2017 issued by the Inspector General of Registration and Controller of Stamps, Maharashtra State charging stamp duty on PAAAs and related guidelines.

On 23-6-2015, the Chief Controlling Revenue Authority issued a circular providing that if the DA is executed only between the cooperative housing society (CHS) and developer, the document to transfer the premises to the member society shall be treated as an independent agreement and stamp duty will be levied on the construction costs.

On 30-3-2017, the Chief Controlling Revenue Authority issued a clarificatory circular stating that every single society member has to countersign the DA as it is a multipartite agreement.

The Bench observed that the issue was the demand by the stamp authority that the individual PAAAs for members or existing occupants must also be stamped at a value reckoned at the cost of construction. However, the Bench noted that the existing members and the occupants cannot be considered as “purchasers” in any sense of the areas to which they are legally entitled upon reconstruction.

The Bench also further asserted that in matters relating to redevelopment of societies, from the perspective of the society member she or he is getting (a) a home in replacement of a home; (b) a larger home in replacement of a smaller home; and (c) the option of purchasing additional area for the replacement home. It is undoubtedly clear that items (a) and (b) are not liable to stamp duty, it is only item (c) that is liable to stamp.

The Court observed that the issue of correct payment of stamp duty would affect a large number of redevelopment projects across the State and Mumbai. The Court set aside and revoked the circulars which contemplated that a permanent alternate accommodation agreement executed between the developer and members of the society requires it to be stamped again even though the development agreement executed between the developer and the society is already stamped.

Conclusion

The Bench in its judgment⁴ held the following:

(a) Development agreement between a cooperative housing society and a developer for development of the society’s property (land, building, apartments, flats, garages, godowns, galas) requires to be stamped.

(b) The development agreement need not be signed by individual members of the society. That is optional. Even if individual members do not sign, the DA controls the redevelopment and the rights of society members.

(c) A permanent alternative accommodation agreement between a developer and an individual society member does not require it to be signed on behalf of the society. That too, is optional, with the society as a confirming party.

(d) Once the development agreement is stamped, the PAAA cannot be separately assessed to stamp duty beyond the Rs 100 requirement of Section 4(1) of the Maharashtra Stamp Act, 1958 if it relates to and only to rebuilt or reconstructed premises in lieu of the old premises used/occupied by the member, and even if the PAAA includes additional area available free to the member because it is not a purchase or a transfer but is in lieu of the member’s old premises. The stamp on the development agreement includes the reconstruction of every unit in the society building. Stamp duty cannot be levied twice.

(e) To the extent that the PAAA is limited to the rebuilt premises without the actual purchase for consideration of any additional area, the PAAA is an incidental document within the meaning of Section 4(1) of the Stamp Act.

(f) A PAAA between a developer and a society member is to be additionally stamped only to the extent that it provides for the purchase by the member for actual stated consideration and a purchase price of additional area over and above any area that is made available to the member in lieu of the earlier premises.

(g) The judgment directed the quashing of Circulars dated 23-6-2015 and 30-3-2017 issued by the Inspector General of Registration and Controller of Stamps, Maharashtra being ultra vires of the Stamp Act.

(h) The judgment also stated that the provision or stipulation for assessing stamp duty on the PAAA on the cost of construction of the new premises in lieu of the old premises cannot be sustained.

(i) Reference to redevelopment and homes includes garages, galas, commercial and industrial use, and every form of redevelopment of the society.

The Bench disposed of the writ petitions without any order as to costs.

Implication of the ruling upon the society members

The judgment has provided relaxation to the individual members of the society as they are no more mandatorily required to sign the DA. The individual members of the society only have to comply with the requirement of signing the PAAA without any payment of stamp duty in respect of the redevelopment of their society. However, the individual members of the society shall be required to pay the stamp duty only in respect of the additional area which is purchased by him/her for consideration.

Impact of the ruling on the real estate industry

We have often heard of several instances where the redevelopment of a society gets stalled due to various reasons including the developer facing a paucity of funds, internal disputes between the society members, delayed permissions, and approvals from the Government, etc. One of the other major issues revolving around the idea of redevelopment is the payment of stamp duty.

The judgment in the above matter can be perceived to be a shot in the arm for the real estate industry as it will encourage more societies to go for redevelopment of their society property when need be. It has also provided much needed respite to the residents taking possession of their new homes after the redevelopment of their society property as they are now relieved from the financial burden of paying stamp duty on additional area given by the developers free of cost in their new homes in lieu of their old premises.